Hilltop Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Hilltop is a diversified financial holding company with banking, broker-dealer, mortgage origination and property-and-casualty insurance businesses. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and condition
- Profit: Net income was $39.8 million, up from $24.7 million in Q1 2018. Income attributable to Hilltop was $38.8 million, or $0.41 per diluted share, versus $24.4 million, or $0.25. Pretax income rose 60% to $51.4 million; effective tax rate was 22.6% versus 23.3%.
- Revenue and expenses: Net interest income increased 5% to $108.9 million; noninterest income rose 7% to $252.5 million. Noninterest expense was nearly flat at $309.1 million, up from $308.2 million. Net gains from loan sales and other mortgage production income declined to $96.1 million from $105.8 million.
- Margins and returns: Net interest margin was 3.69%, compared with 3.52% (taxable-equivalent: 3.70% versus 3.53%). Return on average assets improved to 1.21% from 0.77%; return on average equity to 8.04% from 5.19%.
- Cash flow: Operating activities provided $326.1 million, versus $185.5 million in Q1 2018. Investing activities used $306.8 million, versus $13.6 million; financing activities used $327.3 million, versus $177.1 million. Cash, cash equivalents and restricted cash decreased $308.0 million during the quarter to $470.5 million.
- Balance sheet and liquidity: Total assets were $13.55 billion, down from $13.68 billion at year-end. Loans held for investment, net, were $6.95 billion, up from $6.87 billion; loans held for sale declined to $1.06 billion from $1.39 billion. Deposits were $8.30 billion, down from $8.54 billion. Hilltop reported $2.02 billion in total stockholders’ equity.
- Borrowings: Short-term borrowings were $914.5 million, down from $1.07 billion; notes payable were $225.4 million and junior subordinated debentures $67.0 million. The company also recorded $118.5 million of operating lease liabilities following adoption of the new lease standard.
- Credit: The allowance for loan losses was $58.8 million, or 0.84% of gross loans held for investment, versus $59.5 million and 0.99% at year-end. Nonperforming assets declined to $54.0 million from $61.6 million; nonperforming loans were 0.38% of total loans versus 0.41%.
- Capital: Hilltop’s total capital ratio was 17.64% and common equity Tier 1 ratio was 16.75%. PlainsCapital was classified as well-capitalized, with total capital of 14.60% and common equity Tier 1 of 13.89%.
Material changes and segment results
- Banking: Pretax income increased 7% to $41.6 million, supported by higher net interest income and loan growth. Deposit costs rose, and the provision for loan losses shifted to $1.0 million from a $1.8 million recovery. The quarter included a $2.0 million release of previously estimated hurricane-loss reserves.
- Broker-dealer: Pretax income rose to $16.4 million from $3.6 million. Noninterest income increased to $91.3 million from $68.5 million, primarily due to stronger trading gains; compensation expense also increased.
- Mortgage origination: Pretax income improved to $2.9 million from a $2.7 million loss, despite originations declining 17% to $2.45 billion. Lower operating costs and variable compensation helped offset lower loan-sale gains.
- Insurance: Pretax income increased to $6.8 million from $4.8 million, mainly reflecting fewer weather-related losses and gains on equity securities, partly offset by lower premiums. The combined ratio worsened to 86.5% from 85.2%.
- Acquisition comparability: The 2019 banking results include The Bank of River Oaks, acquired August 1, 2018; its results were not included in Q1 2018.
Outlook, commentary, risks and unusual items
- Management provided no consolidated earnings guidance. It expected modest improvement in national municipal issuance volume in 2019 and anticipated approximately $1.0 million in monthly PrimeLending cost savings for the remainder of 2019 versus average monthly costs in the first three quarters of 2018.
- Management said acquired-loan discount accretion is expected to decline as loans repay, refinance or renew. Higher deposit rates and the shape of the yield curve may affect net interest income; management noted that short-term rates had risen faster than medium- and long-term rates.
- Management identified credit quality, real-estate loan concentration, interest-rate changes, severe weather, cybersecurity, competition, regulation, litigation, reinsurance collectability and acquisition integration among key risks. Texas and southern U.S. insurance operations face seasonal weather exposure.
- Leadership changes generated $8.0 million of pretax costs in Q1, including a $5.8 million charge associated with Vice Chairman and Co-CEO Alan White’s retirement and $2.2 million in broker-dealer leadership-related charges. The filing says the retirement agreement provided for aggregate payments of $12.4 million and management expected the retirement to reduce compensation expense in future periods. Leadership changes and other efficiency-related charges totaled $8.7 million before tax.
- Hilltop adopted the lease accounting standard on January 1, 2019, recording $121.8 million of operating lease liabilities and $111.9 million of right-of-use assets at adoption. The adoption materially affected the balance sheet but not the income statement. Hilltop Plaza construction assets and liabilities were derecognized under the new standard, with a $1.4 million increase to retained earnings.
- The company said CECL adoption was expected on January 1, 2020 and could require a material increase in the loan-loss allowance; the amount was not yet determinable. Pending litigation was not expected by management to have a material overall effect, though an adverse outcome could be material in a particular period.
- A $50 million share-repurchase authorization runs through January 2020; no repurchases had been made by March 31, 2019. The board declared a subsequent quarterly dividend of $0.08 per share, payable May 31, 2019.
Most important facts for investors to verify
- Whether improved earnings persist after the unusually strong broker-dealer trading results and the Q1 leadership and efficiency charges.
- Trends in deposit costs, net interest margin and acquired-loan discount accretion, including sensitivity to interest-rate and yield-curve changes.
- Credit performance and allowance adequacy, especially given real-estate concentrations and the anticipated CECL transition.
- Mortgage origination volumes, loan-sale margins, PrimeLending cost savings and mortgage indemnification claims; the reserve was $10.7 million at quarter-end.
- Insurance premium trends, combined ratio, weather losses and reinsurance coverage, including the increased participation in certain catastrophe coverage.
- Cash and liquidity movements, deposit outflows, short-term funding needs, capital levels, and the use of the share-repurchase authorization.